Francisco Roch, Harald Uhlig, (2018), “The Dynamics of Sovereign Debt Crises and Bailouts”, CEPR, discussion paper, May
Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a “sunspot”-coordinated buyers strike. We introduce a bailout agency, and characterize the strategy with the minimal actuarially fair intervention which guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.
- Maria Demertzis & Stavros Zenios, (2018), «State contingent debt as insurance for euro-area sovereigns», Bruegel, working paper, 26 April
- Sebnem Kalemli-Ozcan, Luc Laeven, David Moreno, (2018), «Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis», discussion paper, CEPR